In a work session last week, the House Local Government Committee heard from the Washington State Association of Counties (WSAC) and the Association of Washington Cities (AWC) about unfunded mandates and the revenues that are available to local governments.

Both organizations talked about Washington’s property tax limits. There are two limits, and there is sometimes some conflation of the two. First, there is the 1 percent limit in the state constitution that limits regular property taxes to $10 per $1,000 of property value. (Of that $10, counties are allocated $1.80 and cities are allocated $3.60 or less.)

Second, there is a statutory 101 percent limit on revenue growth from the property tax (this is sometimes also called a “1 percent” limit). Under the statutory growth limit, a taxing district may levy up to the lesser of the previous year’s revenues adjusted for inflation or 101 percent of the previous year’s revenues. The growth limit is suspended through calendar year 2022 (pursuant to the 2017 McCleary education funding bill). (For more on the limits, see our 2008 report.) [Update: Note too that jurisdictions may increase property taxes above the limits if approved by voters.]

At the work session, Jaime Bodden of WSAC said, “We’re very limited in our funding sources. . . . Roughly 41 percent of county revenue comes from property taxes, which are capped at 1 percent market value.” She added, “The 1 percent cap is by far the biggest inhibitor for counties to grow revenue to cover their operation expenses. Since 2009, state revenue per capita has grown by about 25 percent. In comparison, counties have been able to only grow by 10 percent.”

Candice Bock of AWC said that general property taxes make up about 23 percent of city revenues. Additionally, “the cap on property tax revenue has been a big impact over the last almost 20 years. Nothing that we do only grows at a cost of 1 percent.” At this point, she mentioned the National League of Cities’ 2019 City Fiscal Conditions report, specifically referencing this section of the report on inflationary pressures:

Although inflation in the broader economy has been extremely low over the past few years, this has not been the case for the local government sector. In stark contrast to the Consumer Price Index, U.S. Bureau of Economic Analysis’ Implicit Price Deflator for State & Local Government Purchases rose 3.17 percent between 2017 and 2018. The price of goods and services purchased by local governments, especially healthcare, is rising much more quickly than the basket of goods and services purchased by the typical consumer. This means that the purchasing power of the public sector is weakening in relation to other parts of the economy, and having a large impact on city budgets. When not adjusted for inflation, revenue growth is weak but still positive. In real terms, however, general fund revenues for the sector overall are budgeted for decline in FY 2019.

Bock continued, “We are very supportive of legislation that would revise that 1 percent cap to something that is more in line with the inflationary factors that we’re all dealing with.”

On unfunded mandates, Bodden of WSAC specifically mentioned ballot boxes, same day voter registration, even-year election costs, and trial court public defense. (Over the past several years, counties have been talking about suing the state over unfunded mandates. Earlier this year there were reports that they would finally sue over a law requiring counties to provide one ballot box for each 15,000 voters.)

Bock also discussed some unfunded mandates from the state (her presentation is available here). AWC is concerned about funding needs for infrastructure (citing a report from earlier this year from the Association of Washington Business, AWC, WSAC, and the Washington Public Ports Association) and transportation. Bock said, “We were already talking about the gap in transportation funding prior to the election results.” (Incidentally, today a judge stopped implementation of I-976 until the court challenge is resolved.) Bock mentioned a recent study from the Joint Transportation Committee on city transportation needs, which I wrote about here.

AWC is also concerned about state-driven increases in employee costs. She talked about how rates are set by the state, so cities don’t have any control over them: “Every time there is a benefit increase or a rate increase, that has a direct impact on city budgets.” She specifically mentioned pension rate increases and workers’ compensation rate increases. On workers’ compensation, “this is one we struggle with because we tend to have some high-risk work categories . . . firefighters, police officers.” Indeed, although the Department of Labor & Industries just announced an average 0.8 percent workers’ compensation rate decrease for 2020, the rates for county and city law enforcement officers will increase by 11 percent.

On top of that, there are state-required benefits like paid sick leave and paid family leave. Bock said, “They do cause some administrative costs, but there’s more issues around backfilling these positions. If a police officer is not available for a shift, the work just doesn’t go undone, we have to backfill that with overtime. So these do drive costs for us.”